* Total cost could reach $11 bln - analysts
* Deutsche Bank has set aside extra 600 mln euros
* Five banks at risk of heavy losses
By Steve Slater
LONDON, March 22 European banks squeezed by
regulatory demands for higher capital buffers could take an
additional $11 billion hit from mortgage-related litigation
costs in the United States.
Deutsche Bank has already bumped up its
provisions, this week setting aside an additional 600 million
euros ($777 million) for litigation costs, mainly related to
lawsuits over its role in selling bonds backed by U.S. sub-prime
Clients who bought the mortgage-backed securities from
Deutsche and other banks feel they were misled about the quality
of the assets, which rapidly lost value after the U.S. mortgage
market collapsed between 2006 and 2009.
Deutsche has not broken out its U.S. mortgage litigation
provision, but analysts at Credit Suisse estimate that
it could reach $2.1 billion.
The Credit Suisse research suggests that Swiss bank UBS
could be hit even harder, with a potential cost of
$3.5 billion, and estimates the bill for five European lenders
will come in at $11 billion.
The potential litigation over U.S. residential mortgages
covers several areas, including legal proceedings with the
Federal Housing Finance Agency (FHFA), losses from the
repurchase of securities and from class action lawsuits.
The FHFA action, filed in September 2011, is one of several
- against 17 financial organisations - alleging violations of
laws in connection with the sale of residential mortgage-backed
securities (RMBS) purchased by Fannie Mae and Freddie Mac.
$70 BILLION AT RISK
The U.S. lawsuits are among many litigation risks facing
banks. Credit Suisse analysts assessed 38 areas of potential
litigation at 10 European banks and said that the total cost
could be $70 billion of capital.
UBS said its balance sheet at the end of 2012 reflected a
provision of $658 million with respect to RMBS claims, but its
annual report acknowledged that the cost could be substantially
more or less than this.
A trio of British banks also face U.S. mortgage-related
State-backed Royal Bank of Scotland (RBS) could
suffer a loss of $2.4 billion, Barclays faces a
potential $1.7 billion hit and HSBC could end up with a
bill for $1.1 billion, the Credit Suisse analysts estimated.
Barclays said in its annual report that it will defend
itself against the claims. Defeat, however, could result in a
loss up to the outstanding amount of the relevant RMBS at the
time of judgment, less the market value.
The bank said that the outstanding amount of RMBS related to
the claims was $2.7 billion at the end of December and the
market value was $1.6 billion. Cumulative losses reported on
these RMBS was about $400 million at the end of December, it
RBS, meanwhile, has said that it has substantial legal and
factual defences to mortgage-related claims and will continue to
HSBC's annual report said the bank was unable to make a
reliable estimate of the financial effect of any potential
litigation but said that claims could be significant.
Credit Suisse itself is involved in some U.S.
mortgage-related litigation, relating to its roles as issuer,
sponsor, depositor, underwriter or servicer of RMBS
transactions, according to its annual report released on Friday.
The bank's analysts do not cover Credit Suisse.